Amendments to Delaware’s Limited Liability Company Act

As reported earlier in Robert Forouzandeh’s article New Limited Liability Company Law to Take Effect in 2014 the California Revised Uniform Limited Liability Company Act (“RULLCA”) made substantial changes to California’s limited liability company law and is now in effect.[1] Members and managers of Delaware limited liability companies (“LLCs”) should note that Delaware has also made changes to its limited liability company law, the Delaware Limited Liability Company Act (“DLLCA”), which became effective on August 1, 2013.[2] While the Delaware amendments do not change the prior Delaware law governing LLCs to the extent that RULLCA changes the prior California law governing California LLCs, the Delaware amendments may nevertheless significantly affect members and managers of Delaware LLCs.

Section 18-209: Merger and Consolidation

The amendment to subsection (b) of section 18-209 confirms that in connection with a merger or consolidation, rights or securities of, or interests in, a domestic LLC or other business entity that is a constituent party to the merger or consolidation may remain outstanding.[3]

Section 18-212: Domestication of Non-United States Entities

Section 18-212 pertains to the domestication of non-United States entities.[4] The amendment to subsection (j) confirms that in connection with a domestication under DLLCA, rights or securities of, or interests in, the non-United States entity that is to be domesticated as a domestic LLC may remain outstanding. [5]

Section 18-213 pertains to the transfer, domestication, or continuance of LLCs in any jurisdiction other than the United States or any part of the United States.[6] The amendment to subsection (f) confirms that in connection with a transfer or domestication or continuance of a domestic LLC to or in another jurisdiction pursuant to subsection (a) of section 18-213, rights or securities of, or interests in, such LLC may remain outstanding. [7]

Section 18-214: Conversion of Certain Entities to a Limited Liability Company

Section 18-214 pertains to the conversion of certain entities, including corporations, statutory trusts, business trusts, associations, real estate investment trusts, common-law trusts or any other unincorporated businesses or entities, including partnerships or foreign LLCs to LLCs.[8] The amendment to subsection (i) confirms that in connection with a conversion under section 18-214, rights or securities of, or interests in, the other entity which is to be converted to a domestic LLC may remain outstanding.[9]

Section 18-216: Approval of Conversion of a Limited Liability Company

Section 18-216 pertains to how a domestic LLC may convert to a corporation, a statutory trust, a business trust, an association, a real estate investment trust, a common-law trust or any other unincorporated business or entity, including a partnership or a foreign LLC.[10] The amendment to subsection (d) confirms that in connection with a conversion of a domestic LLC to another entity or business form pursuant to section 18-216, rights or securities of, or interests in, the domestic LLC which is to be converted may remain outstanding.[11]

Section 18-703 pertains to the right of a judgment creditor of a member or of a member’s assignee to recover via a charging order and protects against the involuntary transfer of an LLC interest.[12] The amendment to subsection (a) clarifies that the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of such LLC interest, thereby confirming that the judgment creditor only obtains economic rights associated with the LLC interest.[13] Moreover, the amendment to subsection (d) confirms that the entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member’s assignee may satisfy a judgment out of the judgment debtor’s LLC interest by clarifying that attachment, garnishment, foreclosure or other legal or equitable remedies are not available to judgment creditors, whether or not the LLC has one member or more than one member.[14] Some cases in other jurisdictions interpreting non-Delaware law have found that similar charging order protections did not protect single-member entities because there are no non-debtor members to protect.[15]

Section 18-1101: Construction and Application of Chapter and Limited Liability Company Agreement

Subsection (j) of section 18-1101 is an entirely new provision to DLLCA that clarifies that the provisions of DLLCA, including the protections of limited liability afforded to LLCs, apply irrespective of whether an LLC has one or more members.[16]

Section 18-1104: Cases Not Provided For in Chapter 18 of Title 6

The amendment of section 18-1104 of DLLCA states that in some circumstances fiduciary duties apply to Delaware LLCs when the LLC agreement does not explicitly provide for such fiduciary duties.[17] The synopsis accompanying the amendments provides an example, stating that a manager of a manager-managed LLC would usually have default fiduciary duties even if the LLC agreement does not expressly establish such duties.[18] The amendment thus resolves the question of whether default fiduciary duties exist for Delaware LLCs, a question presented by the Delaware Supreme Court in Gatz Properties, LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012). Section 18-1101(c) of DLLCA, which was not amended, continues to provide that fiduciary duties may be expanded, restricted, or eliminated by provisions of an LLC agreement.[19]

Cal. Corp. Code §§ 17701.01-17713.13 (West, Westlaw through Ch. 1 of 2014 Reg.Sess. and all propositions on the 6/3/2014 ballot).